The Chinese stocks that can be expected to soar with a dovish Fed
As the US Federal Reserve struck an unexpectedly dovish tone at the latest policy meeting, oil, gold and other metal stocks are expected to benefit from a softer US dollar outlook and increasing risk appetite of investors, according to analysts.
The Fed on Wednesday surprised markets by signalling only two rate increases in 2016, citing factors such as global economic uncertainty and volatile financial markets. That was significantly lower than the four increases hinted at the end of December.
In the wake of the new policy statement, the US dollar index (DXY), which tracks the greenback against a basket of other major currencies, had declined 1.9 per cent as of Friday morning. The WSJ dollar index, another closely watched measure of the dollar strength, also touched its lowest level in five months.
The weakness in the greenback has since pushed up many USD-denominated commodities, including crude oil, iron ore, gold, copper and aluminium. April WTI crude has surged since late Wednesday, jumping to finish above US$40 a barrel on Thursday, driven by the dovish Fed statement and a scheduled meeting of major oil producers next month to discuss output cut. Copper prices have also gained more than 2 per cent.
“It has conceded the April rate hike is a non-talking point. And with only ten pips (percentage point) priced in for June, we should expect the US dollar to slide, triggered by a dovish Yellen. Especially against a backdrop of improving risk sentiment and commodity currencies,” said Stephen Innes, a foreign exchange trader at Oanda.
“With the road now paved, we could be in store for a substantial rally in commodities, EM (emerging market) currencies and gold,” he added.
Huang Zhen, an analyst at China’s Zhongda Futures, also said the prices of base metals, including copper, aluminium, nickel, and zinc, will be driven by expectations of fewer rate increases from the Fed and a further weakening in the US dollar, as well as rising oil prices.
Consequently, relevant stocks and sectors, including oil and metals, may benefit from a further rebound in commodity prices.
“Oil and copper stocks will continue to rise, as expectations have tempered for an imminent Fed rate increase and investors are chasing risk assets,” said analysts from Wing Fung Securities in a research note on Friday.
Ao Chong, an analyst from Citic Securities, also predicted that the metal sector in the A-shares market will head higher in the following month.
“Investors have regained risk appetite after the dovish remarks from the Fed, which may drive capital inflows to emerging markets and risk assets,” he said.
The CBOE (Chicago Board Options Exchange) Volatility Index (VIX), a key measure of implied volatility in the US S&P 500 index, fell 11 per cent on Wednesday to close at a three-month low of 14.99, after the Fed released its policy statement.
“We believe risk assets, mainly equity securities and commodities, will post an uptrend in the following month due to loose monetary policy from global central banks,” Ao added.
A weakening US dollar may also lead to a further rebound in commodity prices and upbeat projections of corporate earnings, pushing up share prices of the metal sector, Ao said.
Looking ahead, he said he expects non-ferrous metals, including gold, silver, copper, zinc, nickel, and aluminium, to post price increases of 8 to 15 per cent in the coming month.
As a result, China-listed non-ferrous metal stocks may jump 10 to 15 per cent on average, with the subsectors of gold, copper and zinc all surging 25 to 30 per cent in particular.
“Non-ferrous metal prices could hit their peak of the year in the second quarter, and related stocks in A-shares markets will also see a seasonal high,” he said.
Among the metal stocks, Ao recommended industry leaders in the precious metal subsector, as well as copper and tin stocks.
His favoured picks include Shanghai-listed Shandong Gold Mining, Shenzhen-traded Yunnan Tin Group, and Shanghai-traded Jiangxi Copper, with projected 2016 PE (Price/Earnings) ratios of 64, 25 and 27 respectively.